Crime Pays: The SEC's Slap on the Wrist for Angelo Mozilo

Let's say a business leader makes hundreds of millions of dollars through criminal practices that end up wiping out the wealth of myriad homeowners and contributing to the biggest economic crisis in 70 years. Then, as punishment, he is forced to fork over $67.5 million -- and yet faces no prison time. Has justice been done?

Well, if you listen to the SEC -- and plenty of media commentators, too -- the settlement just reached with former Countrywide CEO Angelo Mozilo was tough stuff. It was reportedly among the largest fines ever imposed on an individual by the SEC. To be sure, $67.5 million is big money. Except in comparison to the fortune that Mozilo made presiding over one of the shadiest mortgage firms of all time -- reportedly a half billion dollars. Time magazine didn't just name Mozilo one of the "25 people to blame for the financial crisis," it put him on the top of the list. Countrywide has been sued by nearly a dozen state attorney generals for its predatory lending practices. The company, now owned by Bank of America, has also been hit by a blizzard of other suits.

One reason that Mozilo got away with so much is that he effectively bribed numerous regulators and lawmakers, of both parties, with dirt cheap mortgages through his so-called "Friends of Angelo" program.

Ultimately, Mozilo wasn't even nailed for his mortgage practices. They SEC got him for insider trading and securities fraud, alleging that Mozilo unloaded Countrywide's stock on unwitting investors as the company began to tank -- all the while saying that everything was fine.

As is common in these cases, Mozilo did not acknowledge any wrongdoing as part his settlement with the government. That outcome is reminiscent of how the corrupt financial analysts, Jack Grubman and Henry Blodget, were let off the hook. Both settled with regulators after playing key roles in the dotcom scandals of the 1990s. When those settlements were reached, many observers predicted -- myself included -- that the absence of any personal punishment for the analysts would encourage future greed and lawlessness.

Now the cycle is being repeated. It is hard to see how the Mozilo settlement -- coming on the heels of another weak SEC settlement with financier Steve Rattner -- will deter future wrongdoing. (See a critique of the Rattner deal at CheatingCulture.com.) Indeed, it could have the contrary effect. If you can make a great fortune behaving badly, get busted, and still end up with most of that future, then you've come out way ahead. At least in financial terms.

In defense of the SEC, complex white-collar cases can be difficult to win at trial. Especially when the defendant can spend limitless amounts of money on the best legal team. And that truth, too, is well known among well-heeled criminals.

So in the end, here's the calculus that might run through the mind of an executive considering breaking the law in order to make a huge fortune: First, they probably will never get investigated. But if they do get investigated, they probably will never go to trial. But if their case does come to court, they stand a decent chance of winning by hiring superior legal firepower. And even if they lose in court, their sentence may be short and they may still end up very wealthy. (See: Michael Milken).

None of this is to say that Angelo Mozilo doesn't have regrets. Like many central figures in big financial scandals, he doesn't seem like an especially bad guy. He grew up the son of a butcher and worked his way to the top of the mortgage business over many years. His intentions seemed noble at earlier points in his career, as he talked about making homes more affordable to low-income Americans. Mozilo also raised questions about Countrywide's practices. As the New York Times describes,

In its complaint, the S.E.C. cited a series of e-mails written by Mr. Mozilo starting in 2006 that decried some of Countrywide's lending practices even as the company's executives publicly boasted about its high-quality loans.

"In all my years in the business, I have never seen a more toxic product," Mr. Mozilo wrote in an April 17, 2006, e-mail to Mr. Sambol [his chief financial officer], referring to loans that allowed borrowers with poor credit histories to buy homes without putting any money down.

Mr. Mozilo also warned his colleagues about the dangers of a popular type of adjustable-rate mortgage that let borrowers pay a fraction of the typical monthly charge. In an April 2006 e-mail, Mr. Mozilo wrote that he had "personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated."

And yet Mozilo let Countrywide's subprime mortgage machine march on -- ultimately to disaster. Mozilo's story is yet more testimony to the seductive power of big money in an age of soaring inequality and lax regulation. It would be nice to think that this age has come to a close. But Mozilo's light punishment, with the clear message that crime pays, will help ensure that is not the case.